SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 For the Fiscal Year Ended  December  31, 1996  containing  only
     financial  statements  pursuant to Rule  15d-2.

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION 13  OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

     Commission File Number 0-22103

                      HEMLOCK FEDERAL FINANCIAL CORPORATION
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)

                 Delaware                                       36-4126192
--------------------------------------------              ----------------------
       (State or Other Jurisdiction                          (I.R.S. Employer
     of Incorporation or Organization)                    Identification Number)

5700 West 159th Street, Oak Forest, Illinois                      60452
--------------------------------------------              ----------------------
  (Address of Principal Executive Offices)                       Zip Code

       Registrant's telephone number, including area code: (708) 687-9400
                                                           --------------
                                  ------------

           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None

           Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

     Indicate  by check  mark  whether  the  Registrant  (1) filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  twelve  months (or for such shorter  period that the
Registrant was required to file such reports),  and (2) has been subject to such
requirements for the past 90 days. YES [ ] NO [X].

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be  contained,  to the best of  Registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [X]

     As of May 5, 1997,  the  Registrant  had  2,076,325  shares of Common Stock
issued and outstanding.

     The aggregate  market value of the voting stock held by  non-affiliates  of
the Registrant,  computed by reference to the average of the bid and asked price
of such stock as of May 5, 1997 was $23,213,047. (The exclusion from such amount
of the  market  value of the shares  owned by any person  shall not be deemed an
admission by the Registrant that such person is an affiliate of the Registrant.)

                       DOCUMENTS INCORPORATED BY REFERENCE

     None.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS

                              Oak Forest, Illinois

                              FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994


                                    CONTENTS



REPORT OF INDEPENDENT AUDITORS........................................    1


FINANCIAL STATEMENTS

     STATEMENTS OF FINANCIAL CONDITION................................    2

     STATEMENTS OF INCOME.............................................    3

     STATEMENTS OF CHANGES IN EQUITY..................................    4

     STATEMENTS OF CASH FLOWS.........................................    5

     NOTES TO FINANCIAL STATEMENTS....................................    7

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS



Board of Directors
Hemlock Federal Bank for Savings
Oak Forest, Illinois


We have audited the  accompanying  statements of financial  condition of Hemlock
Federal  Bank for  Savings,  as of December  31, 1996 and 1995,  and the related
statements  of income,  changes in equity,  and cash flows for each of the three
years in the period ended December 31, 1996. These financial  statements are the
responsibility  of the Bank's  management.  Our  responsibility is to express an
opinion on these financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of Hemlock  Federal  Bank for
Savings as of December 31, 1996 and 1995,  and the results of its operations and
its cash flows for each of the three  years in the  period  ended  December  31,
1996, in conformity with generally accepted accounting principles.


                                      /s/ Crowe, Chizek and Company LLP
                                      ---------------------------------
                                      Crowe, Chizek and Company LLP

Oak Brook, Illinois
February 27, 1997

                                                                              1.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                        STATEMENTS OF FINANCIAL CONDITION
                           December 31, 1996 and 1995
--------------------------------------------------------------------------------

                                                         1996           1995
                                                         ----           ----
ASSETS
Cash and due from bank                               $  1,770,710   $  3,143,758
Interest-bearing deposits in financial institutions    15,639,183     10,157,563
                                                     ------------   ------------
     Cash and cash equivalents                         17,409,893     13,301,321
Securities available-for-sale (Note 2)                 42,618,974     39,293,603
Securities held-to-maturity (fair value:  1996 --    
  $30,321,855; 1995 -- $45,748,852) (Note 2)           29,537,388     44,605,765
Loans receivable, net (Note 3)                         53,536,294     45,232,108
Federal Home Loan Bank stock, at cost                     901,000        849,400
Accrued interest receivable                               788,234      1,106,528
Premises and equipment, net (Note 5)                    1,043,015      1,044,406
Prepaid expenses and other assets                         570,722        193,152
                                                     ------------   ------------
     Total assets                                    $146,405,520   $145,626,283
                                                     ============   ============
                                                     
LIABILITIES AND EQUITY                               
Deposits (Note 6)                                    $131,242,630   $130,740,879
Advance from Federal Home Loan Bank                  
  (Note 7)                                              1,500,000      1,500,000
Advance payments by borrowers for taxes              
  and insurance                                           681,208        651,687
Accrued interest payable and other liabilities            866,460        856,393
                                                     ------------   ------------
     Total liabilities                                134,290,298    133,748,959
                                                     
Commitments and contingencies (Notes 12              
  and 13)                                            
                                                     
Equity                                               
     Retained earnings, substantially restricted     
       (Notes 10 and 11)                               11,508,229     11,346,378
     Net unrealized gain on securities               
       available-for-sale, net of income taxes       
       of $388,077 and $339,457 in 1996 and          
       1995, respectively (Note 2)                        606,993        530,946
                                                     ------------   ------------
         Total equity                                  12,115,222     11,877,324
                                                     ------------   ------------
              Total liabilities and equity           $146,405,520   $145,626,283
                                                     ============   ============
                                                    
--------------------------------------------------------------------------------
                See accompanying notes to financial statements.

                                                                              2.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                              STATEMENTS OF INCOME
                  Years ended December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

                                            1996          1995          1994
                                            ----          ----          ----
Interest income
  Loans                                 $ 4,067,979    $3,382,711    $3,064,080
  Mortgage-backed securities              4,616,636     4,904,228     4,508,129
  Securities                                598,774       897,783       400,103
  Other interest-earning assets             853,340       749,956       528,914
                                        -----------    ----------    ----------
    Total interest income                10,136,729     9,934,678     8,501,226

Interest expense
  Deposits                                5,493,859     5,268,569     4,435,674
  Other borrowings                          148,884       147,749       236,928
                                        -----------    ----------    ----------
    Total interest expense                5,642,743     5,416,318     4,672,602
                                        -----------    ----------    ----------

Net interest income                       4,493,986     4,518,360     3,828,624

Provision for loan losses (Note 3)          150,000       133,470       150,000
                                        -----------    ----------    ----------

Net interest income after provision
  for loan losses                         4,343,986     4,384,890     3,678,624

Noninterest income
  Fees and service charges                  379,286       352,251       308,179
  Rental income                              43,257        39,173        68,715
  Loss on sale of securities (Note 2)      (123,580)     (160,680)      (89,099)
  Miscellaneous income                       88,376       106,517        95,579
                                        -----------    ----------    ----------
    Total noninterest income                387,339       337,261       383,374

Noninterest expense
  Compensation and employee
    benefits                              1,681,233     1,634,726     1,536,264
  Occupancy and equipment expenses          719,458       637,172       515,217
  Data processing                           225,715       201,561       203,875
  Federal insurance premiums                302,264       298,137       301,887
  SAIF special assessment                   839,700            --            --
  Gain on sale of real estate owned              --      (223,409)           --
  Advertising and promotion                 129,147       124,001        94,148
  Other                                     589,407       538,759       528,093
                                        -----------    ----------    ----------
    Total noninterest expense             4,486,924     3,210,947     3,179,484
                                        -----------    ----------    ----------

Income before provision for income taxes    244,401     1,511,204       882,514

Provision for income taxes (Note 10)         82,550       559,170       343,216
                                        -----------    ----------    ----------

Net income                              $   161,851    $  952,034    $  539,298
                                        ============   ==========    ==========
                                                    
--------------------------------------------------------------------------------
                See accompanying notes to financial statements.

                                                                              3.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                      STATEMENTS OF CHANGES IN EQUITY Years
                     ended December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------



                                                       Unrealized
                                                     Gains (Losses)
                                                     on Securities
                                          Retained     Available-
                                          Earnings      for-Sale       Total
                                          --------      --------       -----

Balance at January 1, 1994               $ 9,855,046   $      --    $ 9,855,046

Effect of adopting SFAS No. 115,
  as of January 1, 1994, net of
  income tax of $161,220                          --     252,165        252,165

Net income                                   539,298          --        539,298

Decrease in unrealized gain on
  securities available-for-sale, net
  of income tax of $(167,206)                     --    (267,558)      (267,558)
                                         -----------   ---------    -----------

Balance at December 31, 1994              10,394,344     (15,393)    10,378,951

Net income                                   952,034          --        952,034

Reclassification of securities from,
  held-to-maturity to available-for-
  sale, net of tax of $54,498 (Note 2)            --      86,178         86,178

Change  in unrealized loss on
  securities available-for-sale, net
  of income tax of $290,945                       --     460,161        460,161
                                         -----------   ---------    -----------

Balance at December 31, 1995              11,346,378     530,946     11,877,324

Net income                                   161,851          --        161,851

Change in unrealized gain
  on securities available-for-sale,
  net of income tax of $48,620                    --      76,047         76,047
                                         -----------   ---------    -----------

Balance at December 31, 1996             $11,508,229   $ 606,993    $12,115,222
                                         ===========   =========    ===========

--------------------------------------------------------------------------------
                See accompanying notes to financial statements.

                                                                              4.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                            STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          1996            1995            1994
                                                          ----            ----            ----
<S>                                                   <C>             <C>             <C>         
Cash flows from operating activities
  Net income                                          $    161,851    $    952,034    $    539,298
  Adjustments to reconcile net income to net        
    cash provided by operating activities           
     Depreciation                                          141,373         133,588         158,146
     Amortization of premiums and discounts         
       on investment and mortgage-backed            
       securities, net                                     181,169         745,790       1,638,259
     Net loss on sale of securities                        123,580         160,680          89,099
     Provision for loan losses                             150,000         133,470         150,000
     FHLB stock dividends                                       --         (12,800)             --
     Change in deferred income taxes                       (10,233)        112,540           2,517
     Gain on sale of REO                                        --        (223,409)             --
     (Increase) decrease in accrued                 
       interest receivable                                 318,294        (222,139)        110,391
     Increase (decrease) in accrued                 
       interest payable and other liabilities              (38,553)         18,273        (119,225)
     Decrease in deferred loan fees                        (86,295)        (66,432)        (33,200)
     (Increase) decrease in other assets                  (367,337)        233,228         (84,790)
                                                      ------------    ------------    ------------
       Net cash provided by operating activities           573,849       1,964,823       2,450,495
                                                    
Cash flows from investing activities                
  Purchase of securities available-for-sale            (30,473,624)    (39,682,993)    (29,719,559)
  Proceeds from sales of                            
    securities available-for-sale                        7,620,716       4,913,964       4,914,990
  Proceeds from sales of securities held-           
    to-maturity                                                 --         575,152              --
  Principal payments on mortgage-backed             
    securities and collateralized mortgage          
    obligations                                         22,135,875      22,439,602      38,475,954
  Purchase of  securities held-to-maturity                (325,043)     (5,109,961)    (33,254,477)
  Proceeds from maturities and calls of securities      12,605,000      19,000,000      19,252,875
  Proceeds from redemption of FHLB stock                        --              --         154,200
  Purchase of FHLB stock                                   (51,600)             --              --
  Net increase in loans                                 (8,367,891)     (7,640,586)       (734,594)
  Property and equipment expenditures                     (139,982)        (95,686)        (54,320)
  Real estate owned expenditures                                --              --         (56,955)
  Proceeds from sale of real estate owned                       --         223,409         473,292
                                                      ------------    ------------    ------------
       Net cash provided by (used in) investing     
         activities                                      3,003,451      (5,377,099)       (548,594)
                                                    
Cash flows from financing activities                
  Net increase (decrease) in deposits                      501,751         (29,886)     (1,811,876)
  Increase (decrease) in advance payments by        
    borrowers for taxes and insurance                       29,521         (83,089)        105,854
  Repayment of FHLB advances                                    --              --      (1,500,000)
                                                      ------------    ------------    ------------
       Net cash provided by (used in) financing     
         activities                                        531,272        (112,975)     (3,206,022)
                                                      ------------    ------------    ------------
</TABLE>                                           

--------------------------------------------------------------------------------
                                   (Continued)

                                                                              5.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                            STATEMENTS OF CASH FLOWS
                  Years ended December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                          1996            1995            1994
                                                          ----            ----            ----
<S>                                                   <C>             <C>             <C>         
Net increase (decrease) in cash and cash equivalents  $  4,108,572    $ (3,525,251)   $ (1,304,121)

Cash and cash equivalents at beginning of year          13,301,321      16,826,572      18,130,693
                                                      ------------    ------------    ------------

Cash and cash equivalents at end of year              $ 17,409,893    $ 13,301,321    $ 16,826,572
                                                      ============    ============    ============

Supplemental disclosures of cash flow information
  Cash paid during the year for
     Interest                                         $  5,630,979    $  5,395,870    $  4,668,130
     Income taxes                                          316,000         370,880         460,864

Supplemental schedule of noncash
  investing activities

  Transfer of debt securities to available-for-sale from
    held-to-maturity on December 31, 1995                       --       9,310,934              --

  Transfer of debt securities on January 1, 1994 to
    Held-to-maturity                                            --              --      70,394,259
    Available-for-sale                                          --              --      17,074,080
</TABLE>
                                                    
--------------------------------------------------------------------------------
                See accompanying notes to financial statements.

                                                                              6.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature  of  Operations:  Hemlock  Federal  Bank  for  Savings  (the  Bank)  is a
federally-chartered mutual savings bank and member of the Federal Home Loan Bank
(FHLB)  system which  maintains  insurance on deposit  accounts with the Savings
Association Insurance Fund (SAIF) of the Federal Deposit Insurance Corporation.

Use of Estimates in the Preparation of Financial Statements:  The preparation of
financial statements in conformity with generally accepted accounting principles
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
income and expenses  during the reporting  period.  Actual  results could differ
from those  estimates.  The  collectibility  of loans,  fair value of  financial
instruments, and status of contingencies are particularly subject to change.

Securities:  Securities are classified as held-to-maturity when the Bank has the
positive intent and ability to hold those  securities to maturity.  Accordingly,
they are stated at cost,  adjusted for amortization of premiums and accretion of
discounts.  All other securities are classified as available-for-sale  since the
Bank may  decide to sell  those  securities  in  response  to  changes in market
interest rates,  liquidity needs, changes in yields or alternative  investments,
and  for  other  reasons.  These  securities  are  carried  at fair  value  with
unrealized  gains and losses  charged or  credited,  net of income  taxes,  to a
valuation  allowance included as a separate component of equity.  Realized gains
and  losses  on  disposition  are  based on the net  proceeds  and the  adjusted
carrying  amounts of the  securities  sold,  using the  specific  identification
method.

Loans Receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses and deferred loan origination fees and discounts.

Allowance  for Loan  Losses:  Because  some loans may not be repaid in full,  an
allowance for loan losses is maintained. Increases to the allowance are recorded
by a provision for loan losses  charged to expense.  Estimating  the risk of the
loss and the amount of loss on any loan is necessarily subjective.  Accordingly,
the allowance is maintained  by  management  at a level  considered  adequate to
cover  losses  that are  currently  anticipated  based on past loss  experience,
general economic  conditions,  information  about specific  borrower  situations
including their financial  position and collateral values, and other factors and
estimates  which  are  subject  to  change  over  time.   While  management  may
periodically  allocate  portions of the  allowance  for  specific  problem  loan
situations,  including  impaired loans discussed  below,  the whole allowance is
available for any charge-offs  that occur.  Loans are charged off in whole or in
part when management's estimate of the undiscounted cash flows from the loan are
less than the  recorded  investment  in the loan,  although  collection  efforts
continue and future recoveries may occur.
                                                    
--------------------------------------------------------------------------------
                                  (Continued)

                                                                              7.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial  Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS No. 114).  SFAS No. 114 (as modified by No. 118,  effective for
the Bank beginning  January 1, 1995) requires the measurement of impaired loans,
based on the  present  value of  expected  cash flows  discounted  at the loan's
effective interest rate or, as a practical  expedient,  at the loan's observable
market  price  or the  fair  value  of  collateral  if the  loan  is  collateral
dependent.  Under this standard,  loans considered to be impaired are reduced to
the  present  value of  expected  future  cash  flows  or to the  fair  value of
collateral,  by  allocating a portion of the  allowance  for loan losses to such
loans.  If these  allocations  cause the  allowance  for loan  losses to require
increase,  such increase is reported as a provision for loan losses.  The effect
of adopting the Statement was not material to the Bank's consolidated  financial
position or results of operations during 1995.

Smaller balance homogenous loans are defined as residential first mortgage loans
secured by one-to-four-family  residences,  residential  construction loans, and
share loans and are  evaluated  collectively  for  impairment.  Commercial  real
estate loans are evaluated  individually for impairment.  Normal loan evaluation
procedures, as described in the second preceding paragraph, are used to identify
loans which must be evaluated for impairment.  In general,  loans  classified as
doubtful or loss are considered  impaired while loans  classified as substandard
are individually evaluated for impairment. Depending on the relative size of the
credit relationship,  late or insufficient  payments of 30 to 90 days will cause
management to reevaluate the credit under its normal loan evaluation procedures.
While the factors which identify a credit for  consideration  for measurement of
impairment, or nonaccrual, are similar, the measurement considerations differ. A
loan is impaired when the economic  value  estimated to be received is less than
the  value  implied  in the  original  credit  agreement.  A loan is  placed  in
nonaccrual  when  payments  are more  than 90 days past due  unless  the loan is
adequately  collateralized  and in the process of collection.  Although impaired
loan and  nonaccrual  loan  balances are  measured  differently,  impaired  loan
disclosures under SFAS Nos. 114 and 118 are not expected to differ significantly
from nonaccrual and renegotiated loan disclosures.

Recognition  of Income on Loans:  Interest on real  estate and certain  consumer
loans is accrued  over the term of the loans  based upon the  principal  balance
outstanding.  Where serious doubt exists as to the collectibility of a loan, the
accrual of interest is  discontinued.  Under SFAS No. 114 as amended by SFAS No.
118, the carrying values of impaired loans are periodically  adjusted to reflect
cash  payments,  revised  estimates of future cash flows,  and  increases in the
present value of expected  cash flows due to the passage of time.  Cash payments
representing  interest  income are  reported as such.  Other cash  payments  are
reported as reductions in carrying  value,  while  increases or decreases due to
changes  in  estimates  of future  payments  and due to the  passage of time are
reported as adjustments to the provision for loan losses.

--------------------------------------------------------------------------------
                                  (Continued)

                                                                              8.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loan fees, net of direct loan origination costs, are deferred and amortized over
the contractual life of the loan as a yield adjustment.

Real Estate  Owned:  Real estate  owned  represents  property  obtained  through
foreclosure or in settlement of debt  obligations and is carried at the lower of
cost (fair value at date of  foreclosure)  or fair value less estimated  selling
expenses.  Valuation  allowances are recognized when the fair value less selling
expenses is less than the cost of the asset.  Changes in the valuation allowance
are charged or credited to income.

Premises  and  Equipment:  Premises  and  equipment  are  stated  at  cost  less
accumulated  depreciation.  Depreciation  is  computed  using the  straight-line
method over the estimated useful lives of the respective premises and equipment.
Maintenance  and repairs are  charged to expense as  incurred  and  improvements
which extend the useful lives of assets are capitalized.

Income Taxes:  The Bank records  income tax expense based on the amount of taxes
due on its tax return,  plus deferred taxes computed on the expected  future tax
consequences of temporary  differences  between the carrying amounts and the tax
bases of assets and liabilities, using enacted tax rates.

Statement of Cash Flows: Cash and cash equivalents include cash on hand, amounts
due from banks,  and daily federal  funds sold.  The Bank reports net cash flows
for customer loan transactions and deposit transactions.


NOTE 2 - SECURITIES

Securities consist of the following at:

<TABLE>
<CAPTION>
                                                        December 31, 1996
                                        --------------------------------------------------
                                                        Gross        Gross
                                         Amortized    Unrealized   Unrealized      Fair
                                            Cost        Gains       (Losses)      Value
                                            ----        -----       --------      -----
<S>                                     <C>           <C>          <C>         <C>        
Securities available-for-sale
  U.S. government agencies              $ 7,803,830   $   29,586   $ (6,814)   $ 7,826,602
  FHLMC stock                                25,740      725,385         --        751,125
  FHLMC certificates                      7,602,537      149,840    (10,654)     7,741,723
  FNMA certificates                      12,731,043      115,518    (25,272)    12,821,289
  Collateralized mortgage obligations    13,460,754       45,003    (27,522)    13,478,235
                                        -----------   ----------   --------    -----------
                                        $41,623,904   $1,065,332   $(70,262)   $42,618,974
                                        ===========   ==========   ========    ===========
</TABLE>

--------------------------------------------------------------------------------
                                  (Continued)

                                                                              9.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 2 - SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                        December 31, 1996
                                        --------------------------------------------------
                                                        Gross        Gross
                                         Amortized    Unrealized   Unrealized      Fair
                                            Cost        Gains       (Losses)      Value
                                            ----        -----       --------      -----
<S>                                     <C>           <C>          <C>         <C>        
Securities held-to-maturity
  GNMA certificates                     $ 3,058,223   $  106,010   $     --     $  3,164,233
  FHLMC certificates                     10,093,881      412,675     (8,790)      10,497,766
  FNMA certificates                      13,916,127      253,453     (6,777)      14,162,803
  Collateralized mortgage obligations     2,469,157       29,582     (1,686)       2,497,053
                                        -----------   ----------   --------     ------------
                                        $29,537,388   $  801,720   $(17,253)    $ 30,321,855
                                        ===========   ==========   ========     ============
</TABLE>

<TABLE>
<CAPTION>
                                                        December 31, 1995
                                        --------------------------------------------------
                                                        Gross        Gross
                                         Amortized    Unrealized   Unrealized      Fair
                                            Cost        Gains       (Losses)      Value
                                            ----        -----       --------      -----
<S>                                     <C>           <C>          <C>         <C>        
Securities available-for-sale
  U.S. government agencies              $13,132,845   $   31,211   $(38,945)  $13,125,111
  FHLMC stock                                25,740      523,022         --       548,762
  FHLMC certificates                      7,176,085      239,152       (680)    7,414,557
  FNMA certificates                       5,989,017       64,708     (3,913)    6,049,812
  Collateralized mortgage obligations    12,099,513       69,016    (13,168)   12,155,361
                                        -----------   ----------   --------   -----------
                                        $38,423,200   $  927,109   $(56,706)  $39,293,603
                                        ===========   ==========   ========   ===========

Securities held-to-maturity
  U.S. government agencies              $ 1,500,000   $    4,667   $     --   $ 1,504,667
  GNMA certificates                       3,810,140      140,316         --     3,950,456
  FHLMC certificates                     12,954,233      523,207     (5,499)   13,471,941
  FNMA certificates                      17,591,634      396,545     (2,113)   17,986,066
  Collateralized mortgage obligations     8,749,758       89,175     (3,211)    8,835,722
                                        -----------   ----------   --------   -----------
                                        $44,605,765   $1,153,910   $(10,823)  $45,748,852
                                        ===========   ==========   ========   ===========
</TABLE>

On  December  31,  1995,  the Bank  reclassified  a  portion  of its  securities
held-to-maturity   to   available-for-sale   in  accordance  with  "A  Guide  to
Implementation  of Statement 115 on Accounting  for Certain  Investments in Debt
and Equity  Securities",  in order to improve the Bank's  flexibility in meeting
liquidity   needs.   The  amortized  cost  and  unrealized  gain  on  securities
transferred to available-for-sale were $9,310,934 and $140,676, respectively.

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             10.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 2 - SECURITIES (Continued)

The amortized cost and estimated market value of debt securities at December 31,
1996 by contractual  maturity,  are shown below.  Expected maturities may differ
from  contractual  maturities  because  borrowers  may have the right to call or
prepay obligations with or without call or prepayment penalties.

                                              Amortized          Fair
                                                 Cost           Value
                                                 ----           -----
Securities available-for-sale
   Due in one year or less                   $ 5,238,162     $ 5,252,206
   Due after one year through five years       2,565,668       2,574,396
                                             -----------     -----------
                                               7,803,830       7,826,602

   FHLMC stock                                    25,740         751,125
   Mortgage-backed securities and
     collateralized mortgage obligations      33,794,334      34,041,247
                                             -----------     -----------
                                             $41,623,904     $42,618,974
                                             ===========     ===========

Securities  held-to-maturity consist entirely of mortgage-backed  securities and
collateralized mortgage obligations at December 31, 1996.

At December  31, 1996 and 1995,  all of the Bank's  mortgage-backed  and related
securities  were  guaranteed or insured by  quasi-governmental  agencies  (e.g.,
GNMA, FNMA, FHLMC).

Sales of securities available-for-sale are summarized as follows:

                                       For the Year Ended
                                          December 31,
                          --------------------------------------------
                             1996             1995             1994
                             ----             ----             ----
   Proceeds               $7,620,716       $4,913,964       $4,914,990
   Gross losses              123,580          156,726           89,099

Sales of securities held-to-maturity are summarized as follows:

                                       For the Year Ended
                                       December 31, 1995
                                       -----------------
      Proceeds                              $575,152
      Gross gains                              2,026
      Gross losses                             5,980
             
--------------------------------------------------------------------------------
                                  (Continued)

                                                                             11.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 2 - SECURITIES (Continued)

On  February   13,   1995,   the  Bank  sold  six   securities   classified   as
held-to-maturity.  These sales were permissible under the provisions of SFAS No.
115,  since the  securities  had been paid down to less than 15% of the original
par value.


NOTE 3 - LOANS RECEIVABLE

Loans receivable consist of the following at:

                                                           December 31,
                                                   ----------------------------
                                                       1996             1995
                                                       ----             ----
First mortgage loans
  Principal balances:
    Secured by one-to-four-family residences       $48,338,655      $39,088,166
    Secured by multi-family                          2,782,995        3,386,466
    Secured by commercial real estate                  573,278        1,101,429
                                                   -----------      -----------
                                                    51,694,928       43,576,061
  Less:                                                           
    Loans in process                                        --           27,639
    Net deferred loan origination (costs) fees          (2,379)          83,916
                                                   -----------      -----------
      Total first mortgage loans                    51,697,307       43,464,506
                                                                  
Consumer and other loans                                          
  Principal balances:                                             
    Home equity loans                                2,114,104        1,980,641
    Loans on deposits                                  169,101          157,703
    Automobile loans                                   300,867          229,258
                                                   -----------      -----------
      Total consumer and other loans                 2,584,072        2,367,602
  Less allowance for loan losses                       745,085          600,000
                                                   -----------      -----------
                                                   $53,536,294      $45,232,108
                                                   ===========      ===========
                                                               
There were no impaired loans at December 31, 1996 or December 31, 1995.

Nonaccrual  and  renegotiated  loans  totaled  approximately  $0 and $579,000 at
December 31, 1996 and 1995,  respectively.  The approximate  amounts of interest
income that would have been recorded  under the original terms of such loans and
the interest income actually recognized are summarized below:
 
--------------------------------------------------------------------------------
                                  (Continued)

                                                                             12.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 3 - LOANS RECEIVABLE (Continued)

                                                    For the Year Ended
                                                       December 31,
                                            ----------------------------------
                                              1996         1995         1994
                                              ----         ----         ----

Interest that would have been recorded      $     --     $ 55,855     $ 60,972
Interest income recognized                        --      (50,057)     (45,269)
                                            --------     --------     --------
  Interest income forgone                   $     --     $  5,798     $ 15,703
                                            ========     ========     ========

The Bank is not committed to lend  additional  funds to debtors whose loans have
been modified.

Loans serviced for others consisted of approximately $1,931,000, $2,539,000, and
$3,165,000 at December 31, 1996, 1995, and 1994, respectively.  These loans were
sold to the Federal Home Loan Mortgage Corporation.

The Bank's lending  activities have been concentrated  primarily in Cook County,
Illinois,  where its main office is located.  The largest  portion of the Bank's
loans  are  originated  for  the  purpose  of  enabling  borrowers  to  purchase
residential  real estate  property  secured by first liens on such property.  At
December  31,  1996,  approximately  89% of the  Bank's  loans  were  secured by
owner-occupied,  one-to-four-family  residential  property.  The  Bank  requires
collateral on all loans and generally maintains  loan-to-value  ratios of 80% or
less.

Activity in the allowance for loan losses is summarized as follows:

                                                For the Year Ended
                                                   December 31,
                                      --------------------------------------
                                        1996           1995           1994
                                        ----           ----           ----

    Balance at beginning of year      $600,000       $469,126       $234,480
    Provision charged to income        150,000        133,470        150,000
    Charge-offs                         (5,315)        (2,596)            --
    Recoveries                             400             --         84,646
                                      --------       --------       --------
                                      $745,085       $600,000       $469,126
                                      ========       ========       ========

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             13.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 4 - REAL ESTATE OWNED

Activity in the  allowance  for losses for  foreclosed  real estate for the year
ended December 31, 1994 is summarized below:

     Balance at beginning of year                   $ 827,363
     Provision charged to income                           --
     Charge-offs, net of recoveries                  (827,363)
                                                    ---------
       Balance at end of year                       $      --
                                                    =========

There was no activity during 1996 or 1995.


NOTE 5 - PREMISES AND EQUIPMENT

Premises and equipment consists of the following at:

                                                        December 31,
                                                 --------------------------
                                                    1996           1995
                                                    ----           ----
     Land                                        $   76,730     $    76,730
     Building and landscaping                     1,464,915       1,521,237
     Furniture, fixtures, and equipment             472,997         509,260
                                                 ----------     -----------
       Total cost                                 2,014,642       2,107,227

     Accumulated depreciation                      (971,627)     (1,062,821)
                                                 ----------     -----------
                                                 $1,043,015     $ 1,044,406
                                                 ==========     ===========


NOTE 6 - DEPOSITS

Savings and certificate of deposit  accounts with balances greater than $100,000
totaled  $6,421,000 and $6,532,000 at December 31, 1996 and 1995,  respectively.
Deposits greater than $100,000 are not insured.

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             14.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994

NOTE 6 - DEPOSITS (Continued)

At December 31, 1996,  scheduled  maturities of  certificates  of deposit are as
follows:

                    1997                         $49,618,286
                    1998                           8,936,479
                    1999                           3,991,614
                    2000                           1,851,412
                    2001 and thereafter              497,613
                                                 -----------
                                                 $64,895,404
                                                 ===========


NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK

Advances from the Federal Home Loan Bank of Chicago were as follows:

                           Interest
      Maturity Date          Rate            1996             1995
      -------------          ----            ----             ----

     August 19, 1997         9.72%        $1,500,000       $1,500,000
                                          ==========       ==========

The Bank  maintains a collateral  pledge  agreement  covering  secured  advances
whereby  the Bank has  agreed  to at all times  keep on hand,  free of all other
pledges,  liens,  and  encumbrances,  whole  first  mortgage  loans on  improved
residential  property not more than 90-days delinquent  aggregating no less than
167% of the  outstanding  secured  advances  from the Federal  Home Loan Bank of
Chicago.


NOTE 8 - EMPLOYEE PROFIT SHARING PLAN

An employee profit sharing plan was approved by the Board of Directors effective
January 1, 1985. The plan covers  employees having over one year of service (one
thousand  working hours) and who are at least 21 years of age.  Contributions to
the profit sharing plan are determined and approved annually by the Bank's Board
of Directors.  Contributions of $107,791,  $132,347,  and $114,885 were approved
and funded for the years ended December 31, 1996, 1995, and 1994, respectively.

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             15.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 9 - MONEY PURCHASE PLAN

A money purchase plan was approved by the Board of Directors  effective  January
1, 1993. The plan covers employees having over one year of service (one thousand
working  hours) and who are at least 21 years of age.  The Bank  contributes  an
amount equal to ten percent of participants' salaries. Contributions of $81,826,
$90,863,  and $81,490 were funded for the years ended  December 31, 1996,  1995,
and 1994,  respectively.  During  1996,  the Board of Directors  authorized  the
termination of the Bank's money purchase plan.


NOTE 10 - INCOME TAXES

An analysis of the provision for income taxes consists of the following:

                                       For the Year Ended
                                          December 31,
                         ---------------------------------------------
                           1996               1995              1994
                           ----               ----              ----
     Current
       Federal           $107,849           $413,908          $332,179
       State              (15,066)            32,722             8,520
     Deferred             (10,233)           112,540             2,517
                         --------           --------          --------
                         $ 82,550           $559,170          $343,216
                         ========           ========          ========

The  provision  for income  taxes  differs from that  computed at the  statutory
corporate tax rate as follows:

<TABLE>
<CAPTION>
                                               For the Year Ended
                                                  December 31,
                              -----------------------------------------------------
                                    1996              1995               1994
                              ---------------   ----------------   ----------------
<S>                           <C>       <C>     <C>        <C>     <C>        <C>  
Provision for federal
  income taxes computed
  at statutory rate of 34%    $83,096   34.0%   $513,809   34.0%   $300,055   34.0%
State income taxes, net
  of federal tax effect
  and other                      (546)   (.2)     45,361    3.0      43,161    4.9
                              -------   ----    --------   ----    --------   ----
                              $82,550   33.8%   $559,170   37.0%   $343,216   38.9%
                              =======   ====    ========   ====    ========   ====
</TABLE>
               
--------------------------------------------------------------------------------
                                  (Continued)

                                                                             16.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 10 - INCOME TAXES (Continued)

Deferred tax assets (liabilities) are comprised of the following:

                                                             December 31,
                                                       -----------------------
                                                          1996         1995
                                                          ----         ----

Deferred loan fees                                     $      --     $  22,208
Loans, principally due to allowance for loan losses      163,593       107,344
                                                       ---------     ---------
  Total deferred tax assets                              163,593       129,552
                                                                  
Unrealized gain on securities available-for-sale        (388,077)     (339,457)
Depreciation                                             (39,582)      (48,843)
Federal Home Loan Bank stock dividends                   (42,382)      (42,382)
Deferred loan fees                                       (19,526)           --
Other                                                    (18,552)       (5,009)
                                                       ---------     ---------
  Total deferred tax liabilities                        (508,119)     (435,691)
                                                       ---------     ---------
    Net deferred tax liabilities                       $(344,526)    $(306,139)
                                                       =========     =========
                                                                 
The Bank has  qualified  under  provisions  of the  Internal  Revenue Code which
permit it to deduct from taxable  income a provision for bad debts which differs
from the  provision  charged  to income on the  financial  statements.  Retained
earnings at December  31, 1996 and 1995  include  approximately  $3,114,000  for
which  no  deferred  federal  income  tax  liability  has  been  recorded.   Tax
legislation passed in August 1996 now requires all thrift institutions to deduct
a provision for bad debts for tax purposes  based on actual loss  experience and
recapture the excess bad debt reserve  accumulated  in the tax years after 1987.
The  related  amount of  deferred  tax  liability  which must be  recaptured  is
$156,000 and is payable over a six-year period beginning no later than 1998.


NOTE 11 - REGULATORY MATTERS

The Bank is subject to regulatory capital  requirements  administered by federal
regulatory  agencies.  Capital adequacy  guidelines and prompt corrective action
regulations involve quantitative  measures of assets,  liabilities,  and certain
off-balance-sheet   items  calculated  under  regulatory  accounting  practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators  about  components,  risk  weightings,  and  other  factors,  and the
regulators can lower  classifications in certain cases.  Failure to meet various
capital  requirements  can initiate  regulatory  action that could have a direct
material effect on the financial statements.

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             17.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994


NOTE 11 - REGULATORY MATTERS (Continued)

The prompt corrective action regulations provide five classifications, including
well  capitalized,  adequately  capitalized,   undercapitalized,   significantly
undercapitalized, and critically undercapitalized,  although these terms are not
used to  represent  overall  financial  condition.  If  adequately  capitalized,
regulatory   approval   is   required   to   accept   brokered   deposits.    If
undercapitalized,  capital  distributions  are  limited,  as is asset growth and
expansion, and plans for capital restoration are required.

At year end,  actual capital levels (in thousands) and minimum  required  levels
were:

<TABLE>
<CAPTION>
                                                                                           Minimum Required
                                                                                                to be Well
                                                                    Minimum Required          Capitalized
                                                                       for Capital      Under Prompt Corrective
                                                   Actual           Adequacy Purposes      Action Regulations
                                              ---------------       -----------------   -----------------------
1996                                          Amount    Ratio        Amount    Ratio        Amount    Ratio
----                                          ------    -----        ------    -----        ------    -----
<S>                                          <C>        <C>          <C>        <C>         <C>       <C>  
Total capital (to risk-weighted assets)      $12,124    24.6%        $3,936     8.0%        $4,920    10.0%
Tier 1 (core) capital (to risk-weighted                                                  
  assets)                                     11,508    23.4          1,968     4.0          2,952     6.0
Tier 1 (core) capital (to adjusted total                                                 
  assets)                                     11,508     7.9          4,390     3.0            N/A     N/A
Tangible capital (to adjusted total                                                      
  assets)                                     11,508     7.9          2,195     1.5            N/A     N/A
Tier 1 (leverage) capital (to average                                                    
  total assets)                               11,508     7.9          4,395     3.0          7,325     5.0
                                                                                         
1995                                                                                     
----                                                                                     
Total capital (to risk-weighted assets)       11,925    25.6          3,704     8.0          4,630    10.0
Tier 1 (core) capital (to risk-weighted                                                  
  assets)                                     11,346    24.5          1,852     4.0          2,778     6.0
Tier 1 (core) capital (to adjusted total                                                 
  assets)                                     11,346     7.8          4,343     3.0            N/A     N/A
Tangible capital (to adjusted total                                                      
  assets)                                     11,346     7.8          2,172     1.5            N/A     N/A
Tier 1 (leverage) capital (to average                                                    
  total assets)                               11,346     7.8          4,388     3.0          7,314     5.0
</TABLE>

At December 31,  1996,  the most recent  notification  from the Office of Thrift
Supervision  categorized  the  Bank as well  capitalized  under  the  regulatory
framework for prompt corrective action.  There are no conditions or events since
that  notification  that  management  believes  have  changed the  institution's
category.

Federal  regulations  require the Bank to comply with a Qualified  Thrift Lender
(QTL) test which  requires that 65% of assets be  maintained in  housing-related
finance  and other  specified  assets.  If the QTL test is not met,  limits  are
placed on growth,  branching,  new investments,  FHLB advances, and dividends or
the institution must convert to a commercial bank charter.  Management considers
the QTL test to have been met.

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             18.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 12 - OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK

The Bank is party to financial  instruments with  off-balance-sheet  risk in the
normal course of business of meeting the financing needs of its customers. These
financial  instruments include commitments to fund loans and previously approved
unused  lines of credit.  The  Bank's  exposure  to credit  loss in the event of
nonperformance  by the parties to these financial  instruments is represented by
the contractual amount of the instruments.  The Bank uses the same credit policy
for  commitments  as  it  uses  for  on-balance-sheet   items.  These  financial
instruments are summarized as follows:

                                                        Contract Amount
                                                          December 31,
                                                   -------------------------
                                                      1996            1995
                                                      ----            ----
Financial instruments whose contract amounts
  represent credit risk
     Commitments to extend credit, including
       loans in process                            $1,223,000       $615,000

At December 31, 1996, commitments to extend credit,  including loans in process,
consisted of $853,000 in fixed rate  commitments.  These  commitments are due to
expire  within 30 to 45 days of issuance  and have rates  ranging  from 7.25% to
8.50%.

Financial  instruments which  potentially  subject the Bank to concentrations of
credit  risk  include  interest-bearing  deposit  accounts  in  other  financial
institutions  and loans.  At December  31,  1996 and 1995,  the Bank had deposit
accounts with  balances  totaling  approximately  $15,514,000  and  $10,039,000,
respectively, at the Federal Home Loan Bank of Chicago.  Concentrations of loans
are described in Note 3.


NOTE 13 - COMMITMENTS AND CONTINGENCIES

The Bank is,  from time to time,  a party to  certain  lawsuits  arising  in the
ordinary  course of its business.  The Bank believes that none of these lawsuits
would, if adversely determined,  have a material adverse effect on its financial
condition, results of operations, or capital.

At  December  31,  1996 and 1995,  the Bank was  obligated  under  noncancelable
operating  leases for office space.  Net rent expenses under  operating  leases,
including the proportionate  share of taxes,  insurance,  and maintenance costs,
were approximately  $89,000,  $93,000,  and $91,000 for the years ended December
31,  1996,  1995,  and 1994,  respectively.  The  lease for the Oak Lawn  branch
expires  April 1, 1997. In February  1997,  management  informed the  building's
owner of their intention to renew the lease for an additional  five-year  period
expiring April 1, 2002. Management is in the process of renegotiating the Bank's
lease on the Chicago branch and is currently on a month-to-month  lease with the
building's  owner.  Projected  minimum  rental  payments  under the terms of the
leases,  not including  taxes,  insurance,  and  maintenance,  are as follows at
December 31, 1996:

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             19.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued)

               1997                                  $ 46,725
               1998                                    48,300
               1999                                    48,300
               2000                                    48,300
               2001 and thereafter                     60,375
                                                     --------
                 Total                               $252,000
                                                     ========

The deposits of savings  associations  such as the Bank are presently insured by
the  Savings  Association  Insurance  Fund  (SAIF),  which,  along with the Bank
Insurance  Fund (BIF),  is one of the two insurance  funds  administered  by the
Federal   Deposit   Insurance   Corporation   (FDIC).   Due  to  the  inadequate
capitalization  of the SAIF,  a  recapitalization  plan was  signed  into law on
September 30, 1996 which required a special  assessment of approximately .65% of
all  SAIF-insured  deposit balances as of March 31, 1995. The Bank paid $839,700
in November 1996.


NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The   approximate   carrying  amount  and  estimated  fair  value  of  financial
instruments consist of the following:

<TABLE>
<CAPTION>
                                                                (In thousands)
                                                December 31, 1996           December 31, 1995
                                             ------------------------    ------------------------
                                             Approximate                 Approximate
                                              Carrying     Estimated      Carrying     Estimated
                                               Amount      Fair Value      Amount      Fair Value
                                             -----------   ----------    -----------   ----------
<S>                                           <C>           <C>           <C>           <C>     
Financial Assets
----------------
  Cash and cash equivalents                   $ 17,410      $ 17,410      $ 13,301      $ 13,301
  Securities                                    72,156        72,941        83,900        85,042
  Loans, net of allowance for loan losses       53,536        53,873        45,232        46,338
  Federal Home Loan Bank stock                     901           901           849           849
  Accrued interest receivable                      788           788         1,107         1,107

Financial Liabilities
---------------------
  Interest-bearing demand deposits            $(19,175)     $(19,175)     $(20,020)     $(20,020)
  Savings deposits                             (47,173)      (47,173)      (46,054)      (46,054)
  Time deposits                                (64,895)      (65,047)      (64,667)      (64,841)
  Advances from Federal Home
    Loan Bank                                   (1,500)       (1,515)       (1,500)       (1,593)
  Advance payments by borrowers
    for taxes and insurance                       (681)         (681)         (652)         (652)
  Accrued interest payable                        (128)         (128)         (116)         (116)
</TABLE>

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             20.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

For purposes of the above, the following assumptions were used:

Cash  and  Cash  Equivalents:  The  estimated  fair  values  for  cash  and cash
equivalents are based on their carrying  values due to the short-term  nature of
these assets.

Securities  and  Mortgage-backed  Securities:  The fair values of investment and
mortgage-backed  securities  are  based  on the  quoted  market  value  for  the
individual security or its equivalent.

Loans: The estimated fair value for loans has been determined by calculating the
present  value of future  cash flows  based on the  current  rate the Bank would
charge for similar loans with similar maturities,  applied for an estimated time
period until the loan is assumed to be repriced or repaid.

Deposit  Liabilities:  The  estimated  fair  value  for time  deposits  has been
determined  by  calculating  the  present  value of future  cash flows  based on
estimates  of rates the Bank would pay on such  deposits,  applied  for the time
period until maturity. The estimated fair values of interest-bearing  demand and
savings deposits are assumed to approximate  their carrying values as management
establishes  rates on these  deposits  at a level  that  approximates  the local
market area. Additionally, these deposits can be withdrawn on demand.

Advances  from Federal  Home Loan Bank:  The fair value of the Federal Home Loan
Bank advance was  determined  by  calculating  the present  value of future cash
flows using the current rate for an advance with a similar length to maturity.

Accrued Interest: The fair values of accrued interest receivable and payable are
assumed to equal their carrying values.

Off-Balance-Sheet  Instruments:  Off-balance-sheet  items consist principally of
unfunded loan commitments. The fair value of these commitments is not material.

Other assets and  liabilities of the Bank not defined as financial  instruments,
such as property and equipment, are not included in the above disclosures.  Also
not included are nonfinancial  instruments typically not recognized in financial
statements such as the value of core deposits,  loan servicing rights,  customer
goodwill, and similar items.

While  the  above  estimates  are  based on  management's  judgment  of the most
appropriate  factors,  there is no assurance  that if the Bank disposed of these
items on  December  31, 1996 or 1995,  the fair value would have been  achieved,
because  the  market  value  may  differ  depending  on the  circumstances.  The
estimated  fair values at December 31, 1996 and 1995 should not  necessarily  be
considered to apply at subsequent dates.

--------------------------------------------------------------------------------
                                  (Continued)

                                                                             21.

<PAGE>

                        HEMLOCK FEDERAL BANK FOR SAVINGS
                          NOTES TO FINANCIAL STATEMENTS
                        December 31, 1996, 1995, and 1994
--------------------------------------------------------------------------------

NOTE 15 - ADOPTION OF PLAN OF CONVERSION

On September 10, 1996, the Board of Directors of the Bank, subject to regulatory
approval and approval by the members of the Bank,  adopted a Plan of  Conversion
to convert from a federal  mutual  savings bank to a federal  stock savings bank
with the concurrent formation of a holding company and the adoption of a federal
thrift  charter.  The  conversion  is  expected to be  accomplished  through the
amendment  of the Bank's  charter and the sale of the holding  company's  common
stock in an  amount  equal to the  consolidated  pro forma  market  value of the
holding  company  and  the  Bank  after  giving  effect  to  the  conversion.  A
subscription  offering of the shares of common stock is being offered  initially
to the Bank's  eligible  deposit account  holders,  then to other members of the
Bank.  Any  shares  of the  holding  company's  common  stock  not  sold  in the
subscription  offering  will be offered for sale to the general  public,  giving
preference to the Bank's market area.

The Board of  Directors  of the Bank or the holding  company  intend to adopt an
Employee  Stock  Ownership  Plan and various stock option and  incentive  plans,
subject  to  ratification  by the  stockholders  of the  holding  company  after
conversion,  if such  stockholder  approval is required by any  regulatory  body
having  jurisdiction  to  require  such  approval.  In  addition,  the  Board of
Directors is authorized to enter into employment contracts with key employees.

Simultaneous  with the  conversion,  the Board of  Directors  of the Bank or the
holding  company  intend  to  establish  a  charitable  foundation,  subject  to
depositor approval.  The foundation will be a not-for-profit  entity,  initially
funded by a $1 million contribution from the Bank or holding company.

At the time of conversion,  the Bank will establish a liquidation  account in an
amount  equal to its total net worth as of the  latest  statement  of  financial
condition  appearing in the final  prospectus.  The liquidation  account will be
maintained for the benefit of eligible depositors who continue to maintain their
accounts  at the Bank after the  conversion.  The  liquidation  account  will be
reduced  annually to the extent that  eligible  depositors  have  reduced  their
qualifying  deposits.  Subsequent increases will not restore an eligible account
holder's  interest  in the  liquidation  account.  In the  event  of a  complete
liquidation,  each eligible depositor will be entitled to receive a distribution
from the liquidation account in an amount  proportionate to the current adjusted
qualifying  balances for accounts then held. The liquidation  account balance is
not available for payment of dividends.

Conversion  costs will be deferred and deducted  from the proceeds of the shares
sold in the  conversion.  If the conversion is not completed,  all costs will be
charged to expense. At December 31, 1996, $120,000 has been deferred.

--------------------------------------------------------------------------------

                                                                             22.

<PAGE>

                                   SIGNATURES

     Pursuant to the  requirements of the Section 15(d) of the Securities Act of
1934,  the  Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                       HEMLOCK FEDERAL FINANCIAL CORPORATION



                                       By: /s/ Maureen G. Partynski
                                           -------------------------------------
                                           Maureen G. Partynski, Chairman of the
                                           Board and Chief Executive Officer
                                           (Duly Authorized Representative)


     Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following  persons in the  capacities  and on the dates
indicated.



/s/ Maureen G. Partynski                   /s/ Michael R. Stevens
-------------------------------------      -------------------------------------
Maureen G. Partynski, Chairman of the      Michael R. Stevens, President and
Board and Chief Executive Officer          Director
(Principal Executive Officer)


Date: May 8, 1997                          Date: May 8, 1997
      -------------------------------            -------------------------------



/s/ Rosanne Pastorek-Belczak               /s/ Charles Gjondla
-------------------------------------      -------------------------------------
Rosanne Pastorek-Belczak, Director         Charles Gjondla, Director


Date: May 8, 1997                          Date: May 8, 1997
      -------------------------------            -------------------------------



/s/ Kenneth J. Bazarnik                    /s/ G. Gerald Schiera
-------------------------------------      -------------------------------------
Kenneth J. Bazarnik, Director              G. Gerald Schiera, Director


Date: May 8, 1997                          Date: May 8, 1997
      -------------------------------            -------------------------------

<PAGE>

/s/ Jean M. Thornton
-------------------------------------
Jean M. Thornton, Controller and
  Treasurer (Principal Financial and
  Accounting Officer)

Date: May 8, 1997                    
      -------------------------------